Christopher Welch: searching for a perfect 10
Investors in the mining space are always on the lookout for a "perfect 10." Christopher Welch, a mining analyst with Ocean Equities in London, ranks jurisdictions and companies in this interview with The Gold Report, focusing on little known names in Africa.
The Gold Report: Chris, the lifeblood of your business is financing. What's your read on the appetite for junior financings compared to earlier this year?
Christopher Welch: The appetite for high-quality projects in the mining space is basically the same as it was in early 2012. However, in the current environment, where share prices are a bit depressed, it's getting harder to match investors with companies at share prices that are acceptable to both parties.
Aureus Mining Inc. (AUE:TSX; AUE:LSE) is conducting a big fundraising for its New Liberty mine in Liberia, which is positive news demonstrating there are green shoots in the equity space for West African gold, which is encouraging. We're optimistic that there will be more deals done in the near term.
TGR: There's been some instability in Mali, which stemmed from instability in Libya in part, and now there's growing religious tension in Nigeria. Does West Africa remain as stable as you once believed it was?
CW: We need to separate political instability from operational risk. Let's use Mali as a bit of a case study. Randgold Resources Ltd.'s (GOLD:NASDAQ; RRS:LSE) operations were affected, but in a very minor sense. It's important to draw that clear line. Yes, political instability will affect investment appetite for projects in the region, but it's still an area that has fantastic geological potential. It's certainly is a place where business can get done, but investors have to bear in mind political instability.
TGR: Perhaps we could create a scorecard for how you see things for a number of countries in West Africa. Canada is just about as stable as it gets in the world. If Canada scores a 9 out of 10 as a stable jurisdiction, how would you score countries like Burkina Faso, Ghana, Mali, Liberia, Cote d'Ivoire, Sierra Leone, Ethiopia and Eritrea? Let's start with Burkina Faso.
CW: Burkina Faso had similar strife to Mali's, but the Malian issue sprawled and became a much bigger issue. Burkina Faso has an interesting political future, but it's also got a great mining future. Mining is going to be the backbone of economic development for West Africa. Each country has to secure its investment from outside of Africa. If Canada is a nine, I say Burkina Faso is a four. There's perhaps a little bit of instability and political insecurity on the horizon, but that should be sorted out.
Ghana, given its long gold mining history and its stability, has got to be a five. Some recent tax regime changes might have dusted it up a little bit, but it's a very solid country where companies can get the services that support mining. That is very important for operational risk.
Mali has a problem that it has to sort out. Randgold's share prices initially after the coup showed the effect of instability in the country. Yet Randgold's share price has recovered on its continued success in the area. Papillon Resources Inc. (PIR:ASX) has definitely shown that if a company provides great exploration success and resource growth, then the currently political uncertainty doesn't really matter, the company will get an uplift in share price.
I really like Liberia. It's one of the more exciting countries in West Africa. President Ellen Johnson Sirleaf has done a good job getting rid of corruption—she fired half of the executive group because of fears of corruption. Liberia is exciting because it has great geological potential with a pretty stable political outlook in the near term. It's a 5 out of 10.
TGR: Looking at Cote d'Ivoire?
CW: It's had a checkered history. Companies like Amara Mining Plc (formerly Cluff Gold Plc) (AMZ:TSX; AMA:LSE) have some very interesting projects in Cote d'Ivoire. It's got great exposure to the country and understands it very well. Amara has reduced some of my fears about the country, but it's got to put its past behind it and the wounds will take time to heal. It's probably a 3.5 of 10.
TGR: Sierra Leone is next.
CW: There's been a bit of saber-rattling from the two political parties in Sierra Leone. The incumbent has done a bit of what we call "Clintonian triangulation" where it's said, "Oh, my opponent got some support by saying we need to toughen our tax regime on mining projects and mining profits." That's genuine just saber-rattling. The incumbent is probably going to get in again and he's probably going to maintain a good outlook for mining in Sierra Leone.
We've got some good iron ore projects that have been developed recently in Sierra Leone. There may be some uncertainty regarding mining taxes in the country, but companies can develop big projects with large infrastructure requirements. It is stable, but we've got to get a near-term election out of the way to show that it's going to remain stable. I'd give it a 3.5 out of 10.
TGR: The last two are Ethiopia and Eritrea.
CW: We have covered Nyota Minerals Ltd. (NYO:LSE; NYO:ASX) for a good while now. The company has got the Tulu Kapi gold project in western Ethiopia. It's the first public company applying for a mining license in Ethiopia. It's not holding the hand of the government, but has helped where possible while the government gets itself up the information curve on the mining industry and mining law.
We're at a turning point for Ethiopia. It's going to have stable mining law for the first time. When it comes out, depending on tax and royalty rates, we're going to get a new mining jurisdiction on the block. But until that happens, I'd give it a 3 out of 10. Once that happens, which is imminent, that score will go up.
TGR: Who is Ethiopia working with to develop its mining law?
CW: Ethiopia is a very independent country. I've spent a bit of time out there and the Ethiopians are a great people. The country has never been colonized. It is starting from scratch but has looked at other mining laws. The basis of its law is a Western-type of mining law. It's not specifically Australian, but it's been influenced by Australia. It's trying to take in the recent evolutions of mining law, but Ethiopia is basically starting with a blank piece of paper.
TGR: On to Eritrea.
CW: The Eritrean government is pro-mining investment. It has great mineral potential. Bring the two together and it's definitely an interesting mining investment jurisdiction. However, because of the political football nature of Eritrea regarding the UN sanctions, etc., it's a 3.5 out of 10. Most people would probably give it a two, but that's unfair to Eritrea.
TGR: Of the companies operating in these countries, are there examples of management teams that have mitigated risk?
CW: There are good examples of companies that have reduced operational risks. SEMAFO Inc. (SMF:TSX; SMF:OMX) in Burkina Faso has done a great job. It's made sure its agricultural developments have gone hand in hand with its mining developments. It's practical, sustainable development, where it uses very small amounts of operating profits to develop sustainable businesses, like paprika and sesame seed growing alongside the mining projects. It's been able to secure non-unionized mining teams, which is very rare in Burkina Faso.
Another company that has spread its wings in the region is Amara. It's done quite well and has picked a few good projects in certain countries. It's shown that having a broad spread and management based in the region gives it unparalleled information to reduce the operational risk.
TGR: Amara was once Cluff Gold Plc. Why did it change the name?
CW: It had a big change in the management team. Algy Cluff stepped aside to let more development- and operation-focused management come in. Chairman John McGloin joined the team and he's definitely had a positive effect already.
TGR: Is it fair to say that those are very positive changes?
CW: They're very positive changes. John McGloin was an analyst before, so I know him reasonably well.
He was a very well-respected mining analyst, who won the Association of Mining Analyst's analyst of the year award in London last year. He made a pretty quick hop over to Amara. He's got a strong technical background and he's been able to shepherd the resource calculation for its Baomahun project in Sierra Leone very well.
TGR: What are some other tangible things that great management teams do that earn points in your book?
CW: Companies need something that differentiates them—be that grade, scale or some technical aspect. It should pick the thing that makes it special and stick to it and not spread itself too thin. What's going to sell the company is that tag line, "the highest grade mining company" or "the biggest mining company in the region."
TGR: Companies are akin to professional sports teams in that one manager can get more out of the same people or resources than another manager can. What are some West African juniors that have management teams that you would consider a cut above?
CW: I'm going to go with Amara Mining again. It's really a good company. Chief Executive Officer Peter Spivey is based in the region and has unparalleled information about what's going on in every country where it operates. The new management in London is very strong and is quite happy to jump on a plane and spend a long time on the projects. It has the depth and the dynamism to carry out its long-term objectives.
TGR: Amara has the Baomahun gold project in Sierra Leone, which is expected to reach production in 2014 at 135,000 ounces (oz) annually. Financing was supposed to be in place by now and construction started. Is that the case?
CW: John McGloin has taken a very prudent step and said, "Let's not rush the feasibility. Let's get it right." It's quite a bold call because a lot of investors will be looking for delivery sooner rather than later. It's a brave call, but the right call to ensure that the project's going to be economic and profitable.
It's had good exploration success in some of the projects that were written off by many investors. At its Yaoure project in Cote d'Ivoire, it's gone into some of the deeper mineralization. It might be sub-economic if it had to run it on diesel oil, but with a nearby power source, it could be quite profitable. We're waiting on a resource update, which should come out soon based on the recent drilling results.
TGR: It also recently announced a deal with Samsung Electronics Co. Ltd. Is that meaningful to shareholders?
CW: It's very meaningful for shareholders. It's one of two strings to the bow that haven't gotten due recognition. Samsung coming on board shows that it's a company that can get approval by one of the biggest players in the world. It's doing a small loan to help Amara bring on-line the nearby Sega project, which is next to the Kalsaka mine that is already in production. Having a big brother in Samsung means that it can keep its other near-term development projects, like Yaoure, in its portfolio rather than be forced to spin them out to pay for development of Baomahun.
The other aspect of Amara that has not had due recognition is its revenue. If you're looking at a group of, say, six players that are going to bring bigger mines on-line in the near term, Amara differentiates itself because the Kalsaka mine generates good revenue that can help fund near-term development and exploration, which importantly reduces dilution.
TGR: That's one exceptional management team. How about another one?
CW: Volta Resources Inc. (VTR:TSX) has an A-Team with good company experience. Kevin Bullock and Vic King are doing a great job bringing on-line a huge project in Burkina Faso, Kiaka, which has 5 million ounces (Moz). It is not getting due credit for the scale of its projects. Some people are saying they don't think a small company can deliver such a big project. That's unfair. I believe Volta is going to do it given its skills; Volta is one company where the skills of the management differentiate it.
TGR: Volta recently released 111 drill holes from the Phase 4 drilling program in the Kiaka Central area. What should investors make of those results?
CW: The big takeaway is that the company successfully turned blocks of material that were classed as waste into ore that can be mined. It's also shown that there are definitely areas of high-grade mineralization to Kiaka, which are going to improve the economics of the projects.
TGR: What upgrade do you expect to the 1 Moz Inferred resource?
CW: We're probably going to get 60–70% of that kicked into indicated and hopefully lifted into a probable reserve.
TGR: Are there some juniors in Africa that are developing projects proximal to existing mines that could generate takeover interest?
CW: Definitely, in areas like Ghana where there's the infrastructure advantage and the proximal mineralization. Castle Peak Mining Ltd. (CAP:TSX.V) has some interesting early-stage ground that would be attractive to other nearby producers, especially that are known to be increasing their footprint in the region.
TGR: Castle Peak is currently undergoing a drill program on its property in Ghana. What have you made of the results so far?
CW: They're broadly positive, but perhaps it's too early to take them too far.
TGR: What are some projects that you've visited recently that our readers might want to take a closer look at?
CW: One company that's very attractive is Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:FSE), which has the Rompas project in central Finland. Its exploration results so far are eye-popping. Grab samples include several kilos of gold per tonne in grade with uranium, which I know is a bit of a love-it-or-hate-it commodity, but the potential ore in the region would be classed as a concentrate already. It's something that has to be on your watch list, if not in your portfolio already.
TGR: I visited the Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) Kittila mine in Lapland, Finland. That mine has reserves of more than 5 Moz and the grades are around 4.7 grams per tonne (g/t). Could Rompas be even larger?
CW: Its beat it on grade already. Rompas produced the best drill intersection ever seen in Finland of 6 meters (m) at over 600 g/t gold at a depth of 7m. We're looking at a very high-grade project if it can delineate a resource at depth. We're expecting some more drill results in early 2013.
TGR: In your research, you suggested that Mawson's land package could host a new gold mining camp in central Finland. That's high praise indeed. Is that putting the cart before the horse?
CW: We've got to take an optimistic view on this. It's got a large mineralization footprint in the range of 10 square kilometers. It's got Rompas. It's definitely the most advanced project with drilling on it so far. I'm quite confident that the near-term drilling results are going to demonstrate that we're right on our early analysis of the project and the company.
TGR: What are some other companies under coverage that you find interesting?
CW: Condor Gold Plc's (CNR:LSE) La India project in Nicaragua is very interesting. Mark Child, who is at the helm of Condor, has definitely delivered on a great resource increase of more than 2 Moz. He's also delineated a potentially open-pit project. The company is just scratching the surface of that. It has a large land package, which is essentially riddled with gold with lots of epithermal veining across the whole area. It could host a mining district for sure.
TGR: Condor recently acquired the La Mojarra concession in Nicaragua. How is that material to shareholders?
CW: It's very early stage for La Mojarra. The company has done some grab samples. It will run a geophysical survey over its land package, which should add a lot of value. It could show a lot of larger targets. In order to have an area that's got such disseminated gold mineralization over the whole land package, there's got to be a deeper source there. Hopefully, geophysics will give us more information about where a potential source of larger scale could lie.
TGR: What's the earliest we could expect some drill results on La Mojarra?
CW: Condor just did a financing to carry out more drilling, but it is early stage at the moment. It could be the middle of next year.
TGR: What else is on your plate?
CW: Rambler Metals & Mining Plc (RAB:TSX; RMM:LSE) has done very well and just completed a commercial commissioning of its Ming mine in Newfoundland.
Again, you've got to look at the management team. George Ogilvie has delivered. He's done what he said he's going to do and the high grade of the Ming mine is its differentiator. It also has near-term potential to develop a larger zone of mineralization at Ming, which would transform Rambler into a much larger player. Newfoundland offers a lot of exploration potential for some of the last low-hanging fruit in the volcanogenic massive sulfide high-grade space.
TGR: The Ming mine was supposed to start commercial production Nov. 1. Is everything going as planned?
CW: Nov. 1 is the official date of commercial commissioning. It's been operating. It's got its first shipment of concentrate coming up. It's informed its offtake partner, Transamine Trading, that it's got enough concentrate in the Goodyear's Cove port facility to transport.
TGR: During the pilot plant, gold recovery rates averaged 65%. Is there a plan to boost those numbers?
CW: It has a great option to use a hydrometallurgical process on the tailings of the main copper concentrate circuit, which could boost gold recoveries to over 80% or higher based on laboratory testing so far. It's a cheap option and we know it has high-grade gold, so it's a very good thing for the company to do.
TGR: As an investor, would you follow this management team to another company?
CW: I hope the team doesn't leave this one, to be honest. Once you have built a team, and George built his team to bring Ming into production, you can apply the skill set onto other areas. It could grow within Newfoundland or it could go to another part of the world and do exactly the same thing.
TGR: It's fun to talk about these companies. Is there another company that interests you?
CW: Nyota Minerals, which is at a critical stage. Its area has got great exploration potential. Nyota's flagship deposit, the Tulu Kapi mine, is basically the first step. Once it's got Tulu Kapi into production, it'll be able to demonstrate that the initial mine life for the plant at 10 years is just a start.
TGR: There was a delay in Nyota receiving its mining license for Tulu Kapi. Do you think the Ethiopian government is looking for a larger piece?
CW: Investors shouldn't be too concerned. It was a combination of factors that led to the delay, including the death of the prime minister and the departure of two key members of the Ministry of Mines. One of them actually joined a mining company. The Ethiopian government is also on a near vertical learning curve to understand mining and mining investment. There's a bottleneck at the Ministry of Mines in processing all the technical data.
As we saw at Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) when it went into Eritrea, there are going to be problems along the way. Once Nyota has delivered, it'll get due credit. It has good support and good shareholders. Some of them are strategic players in the region. These are investors who have done due diligence and know when a deposit is good.
TGR: What are the odds of the company making another significant discovery beyond Tulu Kapi?
CW: The chance of success in exploration is great. Nyota carried out some wildcat drilling earlier this year on its Northern Block tenements. The results were interesting, but Nyota didn't quite hit the mineralization that was expected. However, what it has learned from the drilling is going to be tremendously important. It can apply that to the wider area. It's doing more grassroots-stage exploration across the area, which could yield some very good results. I'm very optimistic that it's going to find something of decent scale on the Northern Block.
TGR: Where do you believe the sweet spot is for investors looking to put money in gold equities?
CW: We're at a very interesting stage at the moment. Producers are getting the recognition back for having revenue. That value recognition is going to trickle down to the midtiers, juniors and the very junior juniors. Investors have to do their homework to find the right companies that will soon get recognition for success in either exploration or development. Papillon is a great example of backing the project geology and the team that bucks the trend. For me, at the moment, the sweet spot is producers, but I've got to go for the juniors that have that exploration experience and strong management, too.
TGR: Thanks, Chris.
Christopher Welch is a mining analyst with Ocean Equities in London. Before joining Ocean Equities, Welch spent four years with Bloomsbury Minerals Economics as a copper analyst, prior to which he worked as a geologist in Lesotho. He holds a master's degree in international business management and a Bachelor of Science (Honors) in geology from University College London and an Advanced Certificate in Economics from Birkbeck University.
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Source: Brian Sylvester
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Castle Peak Mining Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Chris Welch: I personally and/or my family own shares of the following companies mentioned in this interview: Condor Gold Plc, Amara Mining Plc, Aureus Mining Inc., and Nyota Minerals Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
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